Primary quiet as junk closes year’s first week, pick up expected; oil names ease

By Paul Deckelman and Paul A. Harris

New York, Jan. 5 – The high-yield market closed out the first trading week of the new year on Friday with exactly nothing to show for it in the way of new dollar-denominated and fully junk-rated issues having priced, or even announced.

However, primary market participants said that they expected that would change soon, with several deals slated to go into the pipeline in the coming week.

Besides the planned deal from chain eateries operation Arby’s Restaurant Group Inc. – which first hit market radar screens last month – several other offerings were seen possible, including at least one megadeal-sized transaction.

And participants speculated that one of the early deals could come out of the recently robust energy sector.

In the secondary market, meantime, traders saw some of the energy names, such as exploration and production operators California Resources Corp., EP Energy Corp., MEG Energy Corp. and driller Ensco plc, come off the highs they had notched on Thursday after opening the year with three consecutive sessions of sizable gains fueled by surging crude oil prices.

Crude prices themselves were lower on Friday after several upside sessions.

But other energy credits, such as Continental Resources, Inc. and drillers Noble Holding International Ltd. and Transocean Ltd., were still seen better on the day.

Away from the oil sphere, another energy-related entity – coal producer Murray Energy Corp. – gained solidly in active trading for a second consecutive session.

Apart from energy, drugmaker Valeant Pharmaceuticals International Inc.’s paper was mostly higher.

In telecommunications, several series of wireless provider Sprint Corp.’s bonds were better – but wireline company Frontier Communications Corp. stayed lower.

Statistical market performance measures were higher across the board for a fifth consecutive session on Friday.

Those indicators were also higher all around versus where they had finished out last week. It was the first stronger week after two weeks of mixed results.

Market awaits first 2018 deal

The first four sessions of 2018 came and went without any new issuance.

The last deal to clear the market was Lonestar Resources US Inc.’s 11¼% notes due January 2023, which priced on Dec. 19.

However the pace is expected to pick up dramatically in the week ahead, sources said on Friday.

Although a formal announcement is pending, Arby’s Restaurant Group is expected to come with a $485 million offering of senior notes backing its acquisition of Buffalo Wild Wings Inc., with Barclays leading the deal.

A syndicate banker, speaking Friday afternoon, saw two or three additional deals, including one in the $1 billion to $2 billion range.

Against a backdrop of strong oil prices, issuers in the energy sector are expected to show up in the near term, with at least one or two of them probably issuers for the Jan. 8 week.

A $20 billion January should be achievable, despite zero issuance to the Jan. 8 open, and despite the fact that the Jan. 15 week will be foreshortened in the United States owing to the holiday commemorating Dr. Martin Luther King, Jr., set for Jan. 15, the syndicate banker said.

That leaves 17 sessions remaining before the end of the month.

“There is a feeling out there that issuers will jump in sooner than later because of concerns about rising interest rates later in the year,” the banker said, and added that the March through June period figures to be busier than normal, as long as the market holds in.

People have cash

There is cash to be put to work in high yield, sources roundabout the market are saying.

The junk ETFs attracted a conspicuous amount of cash, inflows totaling $1.5 billion, in the first three sessions of 2018, a trader said.

Daily cash flows for the dedicated high-yield bond funds were positive on Thursday.

The junk ETFs saw $550 million of inflows on the day.

Actively managed high-yield funds saw $150 million of inflows on Thursday.

News of the Thursday daily flows trails Thursday afternoon’s weekly report from Lipper US Fund Flows that the dedicated junk funds saw $186 million of net inflows in the week to Wednesday’s close.

People have cash, II

A trader in the secondary market meantime said that Friday’s market was largely “bid without.

“We saw some good buying from ETF guys,” he said.

On the other hand, he continued, “the real-money guys, I think, are sitting on the sidelines,” although he allowed that “I think that if there was stuff for sale, guys would take a look at it – but I think there really hasn’t been much on offer.”

He further said that “you’ve had some of the ETF guys reaching for paper and you’ve had some guys offering high offerings, trying to get them to pay too much and some of that kind of trading is going on.”

He said that he saw “some pent up cash, guys are trying to get it into the market before, as quickly as possible in the first couple of weeks of the year. That’s what we’re seeing. There hasn’t been a real calendar to speak of, maybe next week you’ll see things start to come in and things will soften up a bit, I don’t know.”

Oil prices move lower

A trader said that “oil took a little bit of a breather” after several straight sessions on the upside and gains in five out of the previous six trading days.

The key domestic benchmark crude grade, West Texas Intermediate for February delivery, was down by 57 cents in Friday trading on the New York Mercantile Exchange, settling at $61.44, while the key international crude grade – March-contract North Sea Brent – ended off by 45 cents per barrel in London futures trading, closing at $67.62.

Even with those losses, crude remains at the highest level it has been since early in 2015.

“Its’s not really off significantly,” the trader declared. “We’re still in this 45-65 [dollar per barrel] kind of range on oil. I don’t know how high it could go from here – but it’s definitely had a good effect on some of the [issues rated] CCCs and I think guys are looking for an opportunity to buy yield.”

With the rise in energy prices spurring buying in the heretofore shaky energy sector, he said, “you’ve seen the CCC kind of basket moving better and there’s a lot of that kind of paper.

“With a healthy oil market backdrop, you’ve seen guys holding their nose a little bit and buying some of this beaten up CCC type paper.”

One such name has been the most actively traded oil and gas credit, Los Angeles-based exploration and production company California Resources’ 8% second-lien senior secured notes due 2022, considered by some to be a benchmark proxy for the sector as a whole.

That bond firmed off its lows for 2017 in the lower 50s during the summer, rising to the mid-80s by the end of the year and continuing to gain as the New Year opened, peaking at 87½ bid on Thursday.

On Friday, a market source said those notes had retreated by around 1¾ points to 85¾ bid, with over $24 million changing hands.

While noting the drop, the first trader pointed out that “they were off a little bit – but these things have enjoyed a tremendous run,” so naturally, there was going to be some profit-taking.

“Is the market going to just go up and up and up? I don’t think so, so it would be prudent to take some [profits] at some point – it’s had a tremendous run.”

Energy names turn mixed

Taking their cue from the lower oil prices, some of the energy credits which had amassed gains over the previous three trading sessions softened on Friday.

Houston-based exploration and production company EP Energy’s 8% notes due 2025 were seen by a trader down nearly 1½ points on the session at 78½ bid, while its 8% notes due 2024 were down 1 1/8 points at 105 3/8 bid.

Calgary, Alta.-based MEG Energy’s 7% notes due 2024 were off by 1 full point at 89½ bid, London-based oil drilling company Ensco’s 4½% notes due 2024 were likewise 1 1/8 points softer at 88¼ bid, on turnover of more than $27 million.

But some energy-type names managed to hold their own, with Oklahoma City-based E&P operator Continental Resources’ 4 3/8% notes due 2028 firming by 3/16 to 101 9/16 bid, with over $13 million traded.

Noble Holding’s 7¾% notes due 2024 ended up ¼ point on the day at 91¼ bid, while oilfield services sector peer Transocean’s 7¾% notes due 2031 edged upward by 1/16 point to just over 93 bid.

Non-oil names hold gains

Away from the oil E&P and oilfield service companies, a trader said that “today’s volume leader was an oddball leading the pack”– St. Clairsville, Ohio-based coal minder Murray Energy’s 11¼% notes due 2021.

Those bonds had risen more than a deuce on the day on Thursday and tacked on another 1 point Friday on volume of more than $30 million to close at 56 1/16 bid.

The trader speculated that the current cold wave blanketing much of the United States “would be good for coal,” boosting sales to the thermal sector.

Away from there, Laval, Que.-based drug manufacturer Valeant Pharmaceuticals’ 6 1/8% notes due 2025 picked up by ¼ point on the day to 93 7/8 bid and its 5 ½% notes due 2023 rose by a similar amount, on volumes of $22 million and $16 million, respectively.

Among the telecommunications names. Sprint’s 7 1/8% notes due 2024 improved by ¼ point to 103 5/8 bid, while the Overland Park, Kan.-based Number Four U.S. wireless provider’s 8¾% bonds due 2032 gained ½ point to 116 bid, both on over $12 million traded.

But Stamford, Conn.-based wireline telecom provider Frontier Communications’ benchmark 11% notes due 2025 lost nearly 7/8 point on the day to close at 74¾ bid, on turnover of more than $16 million.

Indicators stay strong

Statistical market performance measures were higher across the board for a fifth consecutive session on Friday after being mixed before that.

Those indicators were also higher all around versus where they had finished out last week. It was the first stronger week after two weeks of mixed results.

The KDP High Yield Daily Index rose for a seventh straight session on Friday, improving by 6 basis points to close at 72.22, after zooming by 16 bps on Thursday and by 13 bps on Wednesday. Those seven successive gains had followed eight losses in a row.

The index’s yield came in by 2 bps to 5.15%, its fifth straight narrowing, including Thursday’s 6 bps tightening.

Those levels compared favorably with last Friday’s 71.82 index reading and 5.28% yield.

The Markit Series 29 high yield index gained 3/32 point Friday, ending at 109 7/8 bid, 109 15/16 offered, its fourth consecutive rise. It had also ended by ¼ point on Thursday.

And it was up from last Friday’s close at 108 9/32 bid, 108 11/32 offered.

The Merrill Lynch High Yield Index also rose for a fourth session in a row, advancing by 0.107%, on top of Thursday’s 0.277% upturn.

The latest gain raised its year-to-date return to 0.804% from 0.697% on Thursday.

The index had closed out 2017 with a cumulative return of 7.483%.

For the week, the index firmed by 0.818% – its eighth consecutive weekly gain.

© 2015 Prospect News.
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